Retirement Plan Design: Tips to Help Get What You Pay For

Nov 10, 2017

David Blanchett, Morningstar Investment
Management LLC

Running a retirement benefits plan costs money. There are the
administration fees, fund expenses, consultant fees, managed account
fees—and the list goes on. For each item on that list, a plan sponsor
could be sued for not properly monitoring the costs to make sure that
they are reasonable. Plus, plan sponsors want to know that they are
actually getting the value and service for the costs they incurred.

Tips on how to help get the most out of your retirement plan design

Compare investment expenses. A peer group comparison
of the investment-only expenses is just one part of the total costs of
a defined-contribution plan. It’s also important to be mindful of the
peer group. The peer group for a $5 billion defined-contribution plan
is vastly different than that of a $50 million defined-contribution
plan. This is typically easy information for a consultant or provider
to gather, and it should be delivered on a quarterly basis.

Assess administration expenses. Request for
proposals, or RFPs, are time-consuming, but they often result in a
better price, more service, and often both. Don’t let your provider
run your retirement plan design; they are not the fiduciary. It’s
important to ask your provider for a detailed fee analysis of all plan
fees on an annual basis.

Examine how fees are paid. Uneven expense
arrangements, with fees through revenue sharing or brokerage fees
rather than a purer administrative fee, are under more and more
scrutiny. These arrangements can lead to a big question: Should a
participant who uses a service that carries revenue sharing or
generates some fee pay more for the administration of the plan? We
believe the answer is no. We believe a level, balanced administrative
fee approach is more prudent. Within this context, it’s important to
help ensure that some participants aren’t subsidizing the plan cost
for others by investing in funds with higher revenue sharing.

Evaluate whether you’re getting prudent investment
advice. Consultants give investment recommendations, conduct
quarterly reviews, and monitor their recommendations. Once upon a
time, independent information and data about investments was hard to
come by. However, with vast amounts of data and analytics tools now
available on the web, those days are gone.

So how do you know if your consultant is giving you high-quality
advice that is worth the fee? It’s a tough question with no easy
answer, but here are a few ideas that could be useful:

Keep a log. If a fund is being replaced for
performance reasons, continue to keep track of that fund and compare
the future performance of the two funds. You can even request that
an appendix be added to the quarterly performance book with all the
replaced funds and their relevant statistics.

Check the process. When you receive a
recommendation, focus on how the recommendation was derived or the
process that led to a particular fund recommendation. Many
consultants will provide a map of each round of analysis, showing
the total number of funds that were eliminated based upon each of
their criteria. Ask yourself if there is anything innovative,
proprietary, or unique that makes this process valuable.

Take a step back. It’s easy for investment
consultants to dazzle plan sponsors with fancy statistics about
investment performance, but how does it all fit into the big
picture? Sure, creating alpha of 100 basis points in a fund may be
great, but how much of the assets are actually in the fund? Is the
fund suitable for the plan participants? Is it being used
appropriately? These are all questions that should be addressed when
thinking about plan investments.

Please see below for an important disclosure.

Find out how plan sponsors can help maximize
retirement success for their participants.

Morningstar Investment Management LLC is a registered investment
adviser and subsidiary of Morningstar, Inc. The Morningstar name and
logo are registered marks of Morningstar, Inc. Opinions expressed
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shall not be responsible for any trading decisions, damages, or
other losses resulting from, or related to, the information, data,
analyses or opinions or their use. This commentary is for
informational purposes only. The information data, analyses, and
opinions presented herein do not constitute investment advice, are
provided solely for informational purposes and therefore are not an
offer to buy or sell a security. Before making any investment
decision, please consider consulting a financial or tax professional
regarding your unique situation.

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